What is the expected rate of return on the project?
What is the project’s standard deviation of returns? What is the project’s coefficient of variation (CV) of returns? (Hint: CV is defined as the standard deviation of returns divided by the expected rate of return. It measures the amount of risk per unit of return.)
What type of risk do the standard deviation and CV measure?
In what situation is this risk-relevant?
10.5 Several years ago, the Value Line Investment Survey reported the following market betas for the stocks of selected healthcare providers:
At the time these betas were developed, reasonable estimates for the risk-free rate, RF, and required rate of return on the market R(RM), were 6.5 percent and 13.5 percent respectively.
What are the required rates of return on the four stocks?
Why do their required rates of return differ?
Suppose that a person is planning to invest in only one stock rather than a well-diversified stock portfolio. Are the required rates of return calculated above applicable to the investment? Explain your answer.
10.6 Suppose that Apex Health Services has four different projects. These projects are listed below, along with the amount of capital invested and estimated corporate and market betas:
Why do the corporate and market betas differ for the same project?
What is the overall corporate beta of Apex Health Services? Is the calculated beta consistent with corporate risk theory?
What is the overall market beta of Apex Health Services?
How does the riskiness of Apex’s stock compare with the riskiness of an average stock?
Would stock investors require a rate of return on Apex that is greater than, less than, or the same as the return on an average-risk stock?
